Executive compensation is an evolving subject influenced by the pulls and pushes of corporate governance, legislations, Executive Compensation Regulations, lack of astute business talent and business performance. However, in general, executive compensation is way beyond the compensation of workers. 

Executive compensation is often a combination of various elements that don’t form a part of workers’ compensation. This includes long term incentive plans, employee benefits, perquisites, health insurance, short term insurance, bonus, etc. This is apart from the base pay and is often referred to as Total Cash Compensation. However, executives are often paid more than cash compensation. They are also paid with stock options. Since this is in the form of options, the executive can exercise the option at a later date and encash the option. It must also be said that stock options entail less executive taxation compared to the total cash component. 

Executives are also paid with bonuses which are usually formula-driven and have some kind of attached performance criteria. It all depends on the role of the executive. So, while a bonus for a Sales Director may be pegged to incremental growth of revenue; a CEO’s bonus may be pegged to incremental profitability. However, the executive bonus comes under the ambit of executive taxation rules. 

There is no doubt executives get much more than their base pay and bonus. However, it must be kept in mind that there is a regulatory framework to decide the compensation of executives. In this regard, it is a good idea to start with reforms of 2010 in the wake of the crisis that engulfed the US financial market and dragged the global financial and money market indices along with it. 

Dodd-Frank Act

This act was signed into law in 2010 when the shadow of the 2008 housing meltdown and financial crisis was still looming large. The law is a set of regulations devised to reform the financial system. Basically, it is a set of provisions for corporate governance specifically aimed at regulating executive compensation in the public companies of the USA. The law maintains that the Board of Directors has to:

• Have the opinion of shareholders in terms of executive compensation through a voting process 
• Have the opinion of shareholders even in the case of stuff like stock options and other fringe benefits
• Strengthen the compensation committee so that they are not influenced by executive pressure
• Restrict the use of consultants by compensation committees
• Disclose the ration of CEO pay and median employee pay
• Disclose the relationship between performance and pay of executive positions
• Mandate clawback policies for compensation in case of restatements
• Disclose hedging policies that cover directors and employees

Conclusion 

The law has also mandated a shareholder vote on executive compensation once every three years, at the minimum. However, most businesses opt for the annual voting of shareholders. It must be said that since the enactment of this law shareholders have had enhanced say in the matter of executive compensation. On a percentage basis, the say of shareholders in matters of executive compensation has risen to 90% in 2015 from 88% in 2012. Moreover, the 2017 tax act has mandated that not more than $1 million can be deducted from executive compensation for senior executive officers.